Would legalizing Netflix US for Aussies make a difference?

by David Newhoff

The Australian Productivity Commission in its April 2016 draft report recommended amendments to the federal Copyright Act of 1968, including “legalizing” consumer circumvention of geoblocking for streaming services like Netflix1. The most common circumvention practice is the use of Virtual Private Networks (VPNs), widely-available software that tricks a server into thinking that a computer in one location is in a different location.

VPNs are developed and used to protect personal privacy against hacking and to enable secure access to corporate servers by employees travelling outside their home countries; but they can also be used to get around the geographical restrictions on content made available through digital streaming services. Presently it is estimated that about one-fifth of Australian Netflix customers are using VPNs to access the US catalog of films and television shows, which is about twice the size of the catalog available in Australia.

The Commission, along with digital-rights and consumer advocates, and consumers themselves, view this proposed “legalization” as a step toward basic market fairness. It is an understandable response to what seems to many like an easy fix - namely that Netflix should be able to “flip a switch” and provide every country with the same library of entertainment.

There is, however, a lot more to the story than is being presented to the public; and it is doubtful that “legalizing” circumvention of geoblocks will amount to more than a symbolic gesture.

For one thing, it’s not entirely clear that circumventing geoblocks is illegal in the first place.

Is bypassing geoblocks using a VPN illegal?

In Section 10 of the Australian Copyright Act, the language defining the circumvention of “technical protection measures” already exempts consumers’ circumvention of geographic controls for products like DVDs and video games. Presumably wanting this language to be updated for the streaming market, the Commission’s recommendation that the Government “should make clear that it is not an infringement for consumers to circumvent geoblocking technology” appears to be a signal that the Commission isn’t exactly sure the practice is illegal either. [Emphasis added]

For what it’s worth, I think many copyright experts in the US would agree that it would be rather difficult to bring a case under our own anti-circumvention provision - Section 1201 of the DMCA - for use of a VPN to circumvent geoblocking to access otherwise non-infringing material. So, unless Aussies are finding themselves defendants in anti-circumvention claims for this practice, the urgent need for statutory amendment itself may be overstated.

Geoblocking and prices.

The Productivity Commission report describes the following:

Geoblocking is a technology that restricts a consumer’s access to websites and digital goods and services to within their ‘home market’. The practice enables rights holders and intermediaries to segment the Internet into different markets and charge different prices (or offer different services) to consumers based on their location. Geoblocking is the online equivalent of parallel import restrictions, which prevent retailers and consumers from purchasing physical goods from overseas markets.

This is a partial view, and it’s important to note that geoblocking filmed entertainment on streaming platforms is not the “equivalent of parallel import restrictions,” which are viewed by some critics as unfairly affecting the price of books in the Australian market2.

Without getting into parallel import regulation itself, the substantive distinction is that with geoblocking, Australian law is not barring a domestic importer from bringing goods into the country in order to protect a domestic producer.

Although geoblocking can be used as a mechanism for rights holders to distribute digital goods at different prices around the world, it seems misguided to associate this practice with the Netflix model. The streaming company is reportedly experimenting with various subscription prices3 in different markets, but rights holders do not influence these prices, and the size and character of each catalog does not appear to be a factor affecting price. For instance, Argentina pays about half the price of Australia for catalogs of nearly equal size, though the character of each catalog is likely very different.

While the Commission states that Australians are “paying more for less,” the accurate description is that Australians are paying roughly the same price as Americans for less content4. But the factors preventing about 2,000 titles from being on Australian Netflix are various and have nothing to do - even historically - with protecting a domestic producer or with Netflix pricing strategies in each market.

Why do geoblocks exist at all?

One reason a title may not be available is that it’s an older product for which the underlying contracts predate any concept of digital streaming in a global market. In these cases, renegotiating those contracts for new distribution may cost the producer more than a Netflix-type license will return. Or the renegotiation may not be possible at all.

A title may not be desired by foreign viewers in numbers sufficient to make the licensing worthwhile. How many Aussies are clamoring to watch The Andy Griffith Show, for example? Or a title may be culturally or legally inappropriate in a given market, and it is not the role of American filmmakers to dictate or attempt to circumvent those policies.

In another scenario, if the unavailable title is an independent film, there will likely have been pre-sold territory-by-territory distribution rights used to raise capital for production; and global streaming licenses can breach some of these agreements.

With major studio works, longstanding business practices involving multiple producers do not and often cannot adapt as quickly as technologists can introduce new tools to the market. Going forward, we may see more producers migrate toward global licensing schemes rather than a territorial approach. But consumers should recognize that streaming remains a secondary or tertiary distribution channel for many works and that Netflix only entered the Australian market less than two years ago. By contrast, the complex relationships among producers, distributors, and individual creators have often been in place for decades.

Will the Commission’s proposal have any tangible effect on future practices?

If the government “legalizes” circumvention of geoblocks, this may lead more customers to use VPNs to access US Netflix. But beyond providing immediate satisfaction for a segment of viewers, it seems the Commission and local rights groups expect this move will influence the licensing practices and business models themselves. Elle Hunt, writing for The Guardian5 in January, reports, “The consumer advocacy group Choice called on Australian internet users to share their knowledge about how to circumvent geo-blocks to put pressure on Netflix to make its catalog universal.”

This reveals a basic misunderstanding of the still-emerging streaming market. Consumers cannot “pressure” Netflix to do what it has no right to do unilaterally. The company is bound by the license agreements already in force. It is likewise doubtful that circumventing geoblocks will pressure rights holders to radically alter their licensing regimes due to the myriad reasons mentioned above.

But here’s the real story the Commission and groups like Choice seem to be missing: Netflix’s strategy signals a shift away from licensing works owned by others at about the same time that it entered the Australian and other small markets.

According to a March 2015 article in Time6, the US Netflix catalog shrank by 33% in films and 26% in TV shows over a roughly two-year period. Following the business model of premium and cable TV networks, it looks as though Netflix will continue to shed its dependence on others’ works while focusing on its ability to compete as a producer of original works. That is how HBO became HBO after all.

Meanwhile, subscription-based models have to flatten out at some point, and that goes double for a service that streams 100% of its works to all markets at the same time. Like HBO, Netflix is more likely to develop as a brand known for certain types of original production and licensed works than it is to become a one-stop, global jukebox providing all filmed entertainment ever made.

Australians can “legalize” circumvention of geoblocking if they want, but it is unlikely to substantially influence decision-making either by rights holders or streaming services as the market continues to evolve.

David Newhoff is a writer and artists’ rights advocate living in New York. He writes about digital-age and copyright issues on his blog The Illusion of More.